DeFi Money. - stability without a peg
At the initial mint, we will give FLOAT an arbitrary price. Initially, this will be $1.618, which is the Golden Ratio in Mathematics.
After launch, the FLOAT target price will move slowly and trail the cryptocurrency “economy,” represented in the system by the cryptocurrencies stored in the basket.
Here is a simulation which shows how the FLOAT target price would have behaved during 2020 given the ETH prices involved (here ETH price mostly trended up).
Simulation of FLOAT target price throughout 2020
Fundamentally, you cannot exchange FLOAT for any underlying collateral. However, the Protocol has a fund to stabilise the price of FLOAT when it is volatile. This fund is called the ‘Basket' and contains an approved set of cryptocurrencies.
To grow the Basket is simple. When arbitrageurs buy FLOAT from the protocol during auctions, they have to pay for it with one of the approved cryptocurrencies. Once stored in the Basket, they are used at a later date to support the price of FLOAT if it is ever below its target price. Initially in V1 of Float Protocol, the Basket will only contain ETH, with more able to be added by a governance vote.
At the beginning of FLOAT’s life, since you pay for FLOAT with an equivalent value of ETH, the Basket should equal the total value of FLOAT.
The ratio between the value of the Basket and the total value of FLOAT at target price is called the Basket Factor. Therefore, at the beginning, the Basket factor should equal 100%. In general (until changed by a governance vote), the Target Basket Factor will be 100%.
Over time, the Basket Factor will change. For instance, because the value of ETH is volatile, at any one time the collateral factor may be above or below 100%.
In every contraction or expansion auction, the protocol aims to move the Basket Factor to its target price
Since the system starts with a 100% Basket factor, in the early stage of the protocol there should be high confidence that the protocol can stabilise the FLOAT price in times of a lack of demand by contracting its supply. If confidence in the stability of the protocol increases over time, the Basket factor could be decreased at the discretion of the Float Protocol governance.
Initially, the amount of FLOAT will depend on demand during its initial minting ceremony. After that, the supply of FLOAT will fluctuate over time depending upon how much is needed to be minted or burned in an expansion or contraction.